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Wall Street put in a solid performance last night and this has helped European indices rally for a second consecutive day. Investors appear to be more sanguine about the Trump administration’s failure to push through health care reform at the end of last week. The feeling is that tax reform will still go ahead, despite concerns that any cuts look likely to be unfunded and therefore unpopular with many Republicans. But for now investors appear happy to give President Trump the benefit of any doubt with the overall conviction that he will come through in the end. Once again, any sell-off in equities is soon jumped on as a buying opportunity. Yesterday there was the added catalyst of some decent economic data. Consumer Confidence soared to 125.6 on an expectation of an index reading of 113.9. The Richmond Manufacturing Index was also strong while the S&P/Case Shiller housing index also registered solid year-on-year growth.

The UK will officially invoke Article 50 today when officials deliver a letter from UK Prime Minister Theresa May to European Council President Donald Tusk. Some analysts are blaming this for the sharp pull-back in sterling since Monday. This has seen cable lose over 2 cents over the last two days with the GBPUSD breaking below its 100, 50 and 20-day moving averages overnight. It has recovered somewhat in early trade this morning and traders will now be watching to see if it can hold above support around 1.2400. But much now depends on where the dollar goes from here. The greenback has come under intense selling pressure over the past fortnight following the release of a hawkish outlook from the Fed, tumbling bond yields and a back-up in inflation expectations. The dollar hit a fourteen-year high against the euro at the beginning of the year on expectations of a deluge of fiscal stimulus from the Trump administration.

Meanwhile, crude oil continues to recover following its sudden plunge three weeks ago. The sell-off followed an unexpectedly large build in US inventories which suggested that OPEC/non-OPEC production cuts were having little effect. Last night the latest inventory update from the API showed crude inventories rose less than expected. We’ll get a further update later this afternoon.

Stock Index Update

Global indices bounce back

Political worries put to one side - for now

Yesterday investors rushed in to hoover up equities in Europe and the US. The move came after US equities bounced sharply on Monday after an initial mark-down following the Trump administration’s failure to get sufficient Republican support to repeal and replace Obamacare.

At the beginning of this month the Dow and the S&P500 hit all-time record highs, bolstered by President Trump’s first speech to Congress. The speech was light on policy yet investors saw it as both optimistic and presidential. It also appeared to top off a tremendous run for the major US stock indices since the presidential election. This saw the S&P500 rally by 18% from the immediate post-election low on the 9th November to the post-speech high on 1st March. Since then, the major indices have struggled to build on these gains with the Dow and the S&P500 both off a bit over 3% since the beginning of the month.

Investors seem to be backing off the “Trumpflation Trade” which has been such a big driver of the stock market rally since early November. Investors dumped stocks after the Trump administration’s failure to repeal and replace Barak Obama’s Affordable Care Act. The replacement of Obamacare was expected to save anything from $500 billion to $1 trillion - funds needed to help ease through tax cuts. Additionally, the Border Adjustment Tax which could bring in around $1.2 trillion over the next ten years is opposed by members of the “Freedom Caucus” - the Republican group which opposed Trump over the repeal and reform of Obamacare. So it now looks like there will be a significant funding gap when the Trump administration turn their attention to tax cuts. This is anathema to many Republicans.

But for now investors appear happy to give President Trump the benefit of any doubt with the overall conviction that he will come through in the end. Once again, any sell-off in equities is soon jumped on as a buying opportunity. Yesterday there was the added catalyst of some decent economic data. Consumer Confidence soared to 125.6 on an expectation of an index reading of 113.9. The Richmond Manufacturing Index was also strong while the S&P/Case Shiller housing index also registered solid year-on-year growth.

Commodities Update

OPEC/non-OPEC team to review output cut extension

Gold and silver close in on resistance

Last night the American Petroleum Institute released its latest inventory data for the week ending 24th March. This showed crude inventories rose less than expected and this has helped oil to recover further this morning with WTI now back above $48 per barrel. We’ll get a further update from the US Department of Energy later this afternoon.

Oil prices steadied in early trade yesterday. The front-month WTI contract poked its head back above $48 per barrel while Brent managed to put some distance between itself and $50. Then both contracts managed to rally further as the day went on. Some analysts pointed to a supply disruption in Libya as a catalyst for the rally. A production blockage at two key Libyan oil fields has seen production drop by over 250,000 barrels per day. In addition, there was some chatter from Iran and Azerbaijan concerning the possibility of extending the OPEC/non-OPEC production cut deadline beyond June. Over the weekend a committee of ministers from OPEC and non-OPEC countries agreed to evaluate how effective a six month extension to the output cut may be. A technical group together with the OPEC Secretariat will carry out a review and report back next month.

It was a slower start for gold and silver yesterday as both metals marked time following a sharp rally on Monday. The two metals drifted lower in early trade but then pushed back into positive territory later in the session. Gold is trading just shy of $1,260 - a level last hit four weeks ago. Meanwhile silver is closing in on resistance around $18.40. It tried to break above here on a number of occasions at the end of February, but was ultimately rejected. It then suffered a plunge which saw it lose $40 in just one day. Maybe investors will have better luck this time round, although silver may need the sell-off in the dollar to continue to give it the energy to break above here.

Forex Update

Dollar marks time after recent sell-off

Sterling slips ahead of formal notice of EU withdrawal

The US dollar was a touch weaker yesterday in early trade. However, it felt that a lot of the aggressiveness that has driven the recent sell-off may have dissipated. On Monday the Dollar Index along with the USDJPY hit their lowest levels since early November - soon after Donald Trump clinched a surprise victory in the US Presidential Election. However, the dollar managed to rally off its lows later in the session helped by a pick-up in US bond yields and a bounce in US equities.

Yesterday there was more interest in the British pound. Sterling was weaker against all the majors as traders booked profits after its recent rally. Cable has been a particularly strong performer over the past fortnight having bounced off support around 1.2100. Partly this is down to dollar weakness, but it is also a function of improving UK economic data and the increased probability of a rate hike this year. On Monday the GBPUSD poked its head above 1.2600 for the first time since the beginning of February. This seemed a good level for buyers to cash in, particularly as UK Prime Minister Theresa May is due to trigger Article 50, and so start the UK’s withdrawal from the European Union, later today.

Upcoming events

Today’s significant economic data releases and events include UK Net Lending to Individuals, M4 Money Supply and Mortgage Approvals. From the US we have Pending Home Sales and Crude Oil Inventories. Federal Reserve Bank of Chicago President and FOMC-voting member Charles Evans will deliver a speech in Frankfurt at 14:20 BST.

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